So much criticism has been leveled at Robinhood Markets by Wall Street Mandarins that it’s easy to forget that the online brokerage firm has achieved a monumental achievement: Its free trading platform has made investing attractive to young people. – a group which, according to Wall Street, had little interest. to invest after watching their parents suffer financial calamities over the past 20 years.
Robinhood has reached this millennial generation using technology to make market gambling fun. Opening accounts is also easy. And everyone who signs up gets free surprise stock in their account.
Warren Buffett recently criticized Robinhood for creating a casino-like environment. It may be true. But what is little appreciated is the ecosystem that Robinhood has created since its inception in 2013.
In exchange for the ability for clients to trade stocks and options without paying commissions, Robinhood sells orders to market making firms. The practice, known as Payment for Order Flow, or PFOF, is controversial. But the debate about this, and how Robinhood attracts clients, obscures the profit opportunities for investors.
In recent regulatory filings, Robinhood disclosed PFOF’s relationship with
(ticker: VIRT), Citadel Securities, Two Sigma Securities, G1 Execution Services of Susquehanna International Group and Wolverine Securities. Virtu is the only one publicly traded. The rest are private, just like Robinhood.
Virtu has just released first quarter results that have largely exceeded analysts’ expectations. The high-speed automated trading firm reported adjusted earnings per share of $ 2.04, down from about $ 1.29, on adjusted net revenue of $ 728 million.
Piper Sandler analyst Richard Repetto has informed his clients that Virtu plays a critical role in the significant growth of retail investing, while also delivering efficiency to the markets. Repetto described Virtu as an “integral part of the market infrastructure”.
Virtu’s business could slow this year as the first quarter was an extraordinary time for retail investors. But the company has increased its share buyback program by $ 300 million, to $ 470 million. This suggests that he would buy his own stock if the stock were to suffer any weakness.
Investors who are intrigued by the opportunity to own a piece of the market’s infrastructure – infrastructure typically controlled by wealthy private companies – might use the â50/50â strategy to build a position in Virtu. If an investor wanted to buy 2,000 stocks, for example, he would buy 1,000 stocks and sell 10 puts.
With shares at $ 27.84, the June 26 put option could be written for around 60 cents, creating an effective buy price of $ 25.40.
If the stock was above the strike price at expiration, investors could keep the premium for selling the put option. The trade could then be reset with a higher strike price and a later expiration. The sell sell would continue until someone buys the stock.
The risk of this approach is that the stock drops well below the strike price, forcing investors to buy the stock at the higher strike price or adjust the position in the options market. The other risk is that investors miss out on a market rally by selling put options.
Over the past 52 weeks, Virtu stock has fluctuated from $ 20.93 to $ 32.35. Shares have risen nearly 11% this year, about as much as the
S & P500 Index.
While some analysts are concerned that retailer participation will cool off and Virtu’s performance will decline, its role in the markets is unlikely to change. This makes the company a worthy consideration for anyone interested in establishing exposure to a vital part of the market’s liquidity ecosystem.
Steven M. Sears is President and Chief Operating Officer of Options Solutions, an asset management company. Neither he nor the company has a position in the options or underlying securities mentioned in this column.